Brandon, an individual, began business four years ago and has sold §1231 assets with $5,00065o) f losses within the last 5 years. Brandon owned each of the assets for several years. In the currentyear, Brandon sold the following business assets: Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

Question

Brandon, an individual, began business four years ago and has sold §1231 assets with $5,00065o) f losses within the last 5 years. Brandon owned each of the assets for several years. In the currentyear, Brandon sold the following business assets:  Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?

Quizplus · Accepted Answer

To determine the effect on Brandon's tax liability, we need to first calculate the net §1231 gain or loss for the current year.

Sale of Asset A:
- Basis: $30,000
- Sales Price: $40,000
- Gain: $10,000

Sale of Asset B:
- Basis: $20,000
- Sales Price: $12,000
- Loss: ($8,000)

Net §1231 gain: $2,000 ($10,000 gain - $8,000 loss)

Since Brandon has incurred §1231 losses in the past 5 years, we need to look at the current year's §1231 gains and losses separately to determine how they will be taxed.

If the net §1231 gain is greater than the net §1231 loss (which is the case here), the gain is treated as long-term capital gain and the losses are treated as ordinary losses.

Therefore, Brandon's taxable income for the year includes: 
- $13,000 ordinary income (from the income statement)
- $2,000 net §1231 gain 
  
Total taxable income: $15,000

The tax liability can be calculated as follows:

- Ordinary income tax: $13,000 x 35% = $4,550
- Long-term capital gain tax: $2,000 x 15% = $300
- Total tax liability: $4,550 + $300 = $6,150

Therefore, the best choice is (D): $13,000 §1231 gain, $12,000 ordinary income, and $6,150 tax liability.

Brandon, an Individual, Began Business Four Years Ago and Has